October 3, 2008

Reality checks? We don't need no steenking reality checks!

From This American Life (thanks to Jerry Pournelle), comes a tale of a society with a distinct aversion to reality checks.

Alex Blumberg: For example, a guy I met named Clarence Nathan. He worked 3 part time, not very steady jobs, and made a total of roughly 45 thousand dollars a year roughly. He got himself into trouble and needed money, so he took out a loan against his house. A big one.

Clarence Nathan: Call it 540 for round figures

Alex Blumberg: And you basically borrowed that from the bank and they didn’t check your income?

Clarence Nathan: Right. It’s a no-income verification loan. They don't do that. It's almost like you pass a guy in the street and say: lend me 540,000 dollars? He says, what do you do? Hey, I got a job. OK. It seems that casual even though there are a lot of papers that get filled out and stuff flies all over with the faxed and emails. Essentially, that's ... that the process.

Alex Blumberg: Would you have loaned you the money?

Clarence Nathan: I wouldn't have loaned me the money. And nobody that I know would have loaned me the money. I know guys who are criminals who wouldn't loan me that and they break your knee-caps. I don’t know why the bank did it. I’m serious ... 540 thousand dollars to a person w/bad credit. ...

Alex Blumberg: This is Glen Pizzolorusso, who was an area sales manager at an outfit called WMC mortgage in upstate New York [that makes loans and then bundles the mortgages and sells them to investment banks to peddle as Mortgage-Backed Securities]. Just to repeat, he was making 75 to a 100 grand a month. That's over a million dollars a year. Glen was just out of college. ...

Glen Pizzolorusso: We lived mortgage. That’s all we did. This deal, that deal. How we gonna get it funded? What’s the problem with this one? That's all everyone's talking about.

Alex Blumberg: And when Glen wasn't working, he was doing his next favorite thing, spending ... preferably in the company of, and this is his term, b-list celebrities:

Glen Pizzolorusso: We rolled up to Marquee at midnight with a line, 500 people deep out front. Walk right up to the door: Give me my table. Sitting next to Tara Reid and a couple of her friends. Christina Aguilera was doing some, I’m-Christina-Aguilera-and-I’m-gonna-get-up-and-sing kind of thing. Who else was there? Cuba Gooding and that kid from Filthy Rich: Cattle Drive. What was that kids name? Fabian Barabia? ...

Alex Blumberg: Glen had five cars, a 1.5 million dollar vacation house in Connecticut, and penthouse that he rented in Manhattan. And he made all this money making very large loans to very poor people with bad credit.

Glen Pizzolorusso: We looked at loans. These people didn't have a pot to piss in. They can barely make a car payment and we're giving them a 300, 400 thousand dollar house.

Alex Blumberg: But Glen didn't worry about whether the loans were good. That's someone else's problem. And this way of thinking thrived at every step of this mortgage security chain. A guy like Mike Francis, from Morgan Stanley, he told me he bought loans, lots of loans, from Glen's company, and he knew in his gut they were bad loans. Like these NINA loans.

Mike Francis: No Income No Asset loans. that's a liar's loan. We are telling you to lie to us. We're hoping you don't lie. Tell us what you make, tell us what you have in the bank, but we won't verify? We’re setting you up to lie. Something about that feels very wrong. It felt wrong way back when and I wish we had never done it. Unfortunately, what happened ... we did it because everyone else was doing it.

Alex Blumberg: It's easy to ignore your gut fear when you are making a fortune in commissions. But Mike had other help in rationalizing what he was doing. Technological help. Mike sat at a desk with six computer screens, connected to millions of dollars worth of fancy analytic software designed by brilliant Ivy league math geniuses hired by his firm, which analyzed all the loans in all the pools that he bought and then sold. And the software, the data ... didn’t seem worried at all:

Mike Francis: All the data that we had to review, to look at, on loans in production that were years old, was positive. They performed very well. All those factors, when you look at the pieces and parts. A 90% NINA loan from 3 years ago is performing amazingly well. Has a little bit of risk. Instead of defaulting 1.5% of the time it defaults at 3.5% of the time. That’s not so bad. If I’m an investor buying that, if I get a little bit of return, I’m fine.

Adam Davidson: Wait Alex. I want to step in for a moment because this is a very important piece of tape. A big part of this story, of this whole crisis, is that a lot of really smart people, people who knew better, fooled themselves with this data. It was the triumph of data over common sense. Can you play that tape again?

Mike Francis: All the data that we had to review to look at, on loans in production, that were years old, was positive.

Adam Davidson: As we now know, they were using the wrong data. They looked at the recent history of mortgages and saw that foreclosure rate is generally below 2 percent. So they figured, absolute worst-case scenario, the foreclosure rate may go to 8 or 10 or 12 percent. But the problem with is there were all these new kinds of mortgages, given out to people who never would have gotten them before. So the historical data was irrelevant. Some mortgage pools, today, are expected to go beyond 50 percent foreclosure rates.

In retrospect, the basic political-economic idea of the decade was that the financial elites would wind up with all the financial assets while the masses would be kept pacified with lots of nice consumer gadgets and big houses paid for by borrowing from the financial elites. A foolproof plan!

The key issue is that there was nothing going on in America in this decade that would suggest that below, say, the 75% percentile that human capital -- and thus the ability to earn income and to repay debt -- was increasing. Or was ever likely to increase.

In fact, the signs pointed toward a declining per capita ability to pay as the U.S. became increasingly Hispanic. But, no, you couldn't talk about that in polite society. Instead, we had an increasingly diverse, vibrant society so we must have an increasingly diverse, vibrant economy.

Ideas have consequences.

29 comments:

ks said...

This reminds me of a Sopranos episode recently rebroadcast on A&E where Tony and friends defraud HUD on housing loans.

http://www.youtube.com/watch?v=GfcgwxPH7Rc

It seems defrauding on home loans was a theme running in the Sopranos in 2002.

http://en.wikipedia.org/wiki/Calling_All_Cars_(The_Sopranos_episode)

If these housing scams were being written into scripts in 2001/2002 for the most popular/award-winning TV series, how hard could it have been for WaMu or Lehman to accomodate this into their risk models?

dollmaker said...

This whole meltdown reminds me of the classic Simpsons episode "Hurricane Neddy." Flanders's house is destroyed by a hurricane but the Simpsons' one is untouched, which shakes Ned's faith in God. When the town pitches in to rebuild it, he's overjoyed until he actually tours it and it falls apart in front of him. Having thus lost his faith in God AND man, he goes nuts and this classic bit ensues:

Ned walks away from the demolished "house" and begins to buff his
glasses. The right lens falls out, and Ned lets out a groan and puts on his glasses.

Ned: Calm down, Neddly diddily diddily diddily, doodily. They did
their best shodaiddily iddily iddily diddily diddily. Gotta be
nice, hostidididildilidilly ah HELL diddily ding dong crap! Can't you morons do anything RIGHT!?

shocked gasps]

Marge: Ned! We meant well, and everyone here tried their best.

Ned: Well my family and I can't live in good intentions, Marge! Oh, your family's out of control, but we can't blame you, because
you have gooooooooood intentions!

(You can listen to it but not watch it due to litigious Fox lawyers here:
http://www.youtube.com/watch?v=GR9j71xIXco)

It seems this whole meltdown is another case of goooooooood intentions!

Anonymous said...

Well, I think that the story described in this posting is much more indicative of the Meltdown Causes than all the talk of NAMs.

I *still* tend to doubt that all those illegal day-laborers hanging around outside Home Depot were carrying $300K mortgages, and that they eventual defaults triggered the collapse of Lehman Brothers...

Jewish Atheist said...

This is bullshit. It has nothing to do with minorities and everything to do with greedy corporations making bad loans. Nobody forced them to make bad loans and nobody forced financial institutions further up the chain to buy those loans and nobody forced other financial institutions to invest in those loans.

I guarantee you 99% of the people who caused this problem were rich white guys.

Jun said...

As we now know, they were using the wrong data.

Gee -- that sounds familiar:

How Wall Street Lied to Its Computers

Martin said...

"Jun said...

As we now know, they were using the wrong data.

Gee -- that sounds familiar:

How Wall Street Lied to Its Computers"

Interesting article. Thanks for the link.

Anonymous said...

One thing I learned from readin Frank Partnoy's "FIASCO" was never to buy structured paper from an investment bank.

http://www.amazon.com/Fiasco-Inside-Story-Street-Trader/dp/0140278796

Anonymous said...

"I guarantee you 99% of the people who caused this problem were rich white guys."

What percent were rich Jews, by your reckoning? New York money men and such?

There's no one stupider and more unintentionally self-destructive than a Jewish atheist.

Chaim

laura said...

To Steve Sailer,

I rarely comment on someone's blog only to express sadness, grief, disgust; but I just read your post about Michelle Obama's college thesis written when she was 21 years old. I hope you are eating your words about her intellect if you are prepared to vote for Palin after her incoherent ramblings over the past month. Or don't grammatical errors bother you when they come from a hot white chick instead of a hot black one?

Racism sucks in the 21st century. It really does. And I notice that people can actually donate money to you for writing thinly veiled attacks on Michelle Obama. Nice. There were people funding apartheid in South Africa as well, and perhaps the same deep pockets, so I shouldn't say I'm surprised. But it isn't for her intellect that you despise Michelle Obama, but for the fact that she is more successful and important than you will ever be. And because you think that her skin color alone disqualifies her from rising above you in any way.

I don't know why but I have a sudden flash to a look of disgust that might pass over Hunter S. Thompson's, a liberal's, face at a column like yours. If he bothered to read it. Grrrr.

c23 said...

Laura - Palin didn't get into Princeton because of racial preferences, and then resent the whites who had given her this undeserved opportunity.

If there's any reason to despise Michelle Obama, it's for her bitter resentment towards a society which gave her undeserved success, not for her mediocre intellect.

Anonymous said...

Most people here probably favor Obama over McCain because of McCain's strange Bushlike fanaticism on the amnesty/CIR issue. Obama obviously has a high tolerance for anti-white racism, but if he has the same steely determination that McCain has to destroy the US he's being coy about it.

RobertHume said...

Anonymous said...

Anonymous writes:
"Well, I think that the story described in this posting is much more indicative of the Meltdown Causes than all the talk of NAMs.

I *still* tend to doubt that all those illegal day-laborers hanging around outside Home Depot were carrying $300K mortgages, and that they eventual defaults triggered the collapse of Lehman Brothers..."

We might debate whether illegals were responsible for 10% or 50% of the debt, but the point is that the push to accomodate minorities with justifiably poor credit ratings made it necessary to offer the same rates to whites with poor credit ratings. (Who were, no doubt, just as "worthy" as the minorities."

So that's why those folks were available for NPR to interview.

As a side note, I wonder why no minorities were interviewed in the article. PC reasons? Or they were unrepentant? Or they were clearly criminal? Or they did not speak English? (But translators could solve that problem.)

laura said...

Steve Sailer,

I guess this comment is just for you since you deleted my last comment. Did you listen to the rest of that This American Life Program...the one where he talked about this problem cutting across the entire society? Where he spoke about the white guy who used to be a bartender pulling in 100 grand weekly from convincing people to buy houses they couldn't afford...a guy who blew that money on partying with b list celebrities like Christina Aguilera? Your jab about the real problem being the hispanic people lacks any intellectual merit. But you disable comments that disagree with your very racial take on a problem that is far more complex and even interesting than blame it on the brown people. By the way I'm white--but I don't take that as proof of any kind of superiority, moral or intellectual, as you, apparently do.

Jewish Atheist said...

What percent were rich Jews, by your reckoning? New York money men and such?

Oh, I'm sure there were a significant number. My point isn't that this is "white people's" fault -- it's just that the idea that this is all the blacks' and Hispanics' fault is completely at odds with the facts. It's the financial institutions' fault.

Anonymous said...

At least Palin got to where she is by her own efforts, and has the class not to trash the country and system that made her rise possible, all of which is more than Michelle Obama can say. And incidentally, Hunter Thompson was an over-rated hack, and I take great delight in imagining what his reaction would be to SS, assuming someone could teach him how to use the internet, and he was straight enough to read, which was seldom. Of course, what do I know? I'm just a greedy white man.

David said...

anon. said

At least Palin got to where she is by her own efforts, and has the class not to trash the country and system that made her rise possible, all of which is more than Michelle Obama can say.

Amen.

Isn't it clear Michelle Obama is an affirmative action witch of the first water? Her career and character consists entirely of hostility toward my people. And I'm supposed to pretend she's respectable and admirable? Do you think I was born yesterday? The effrontery of Linda types is enormous. MO is an enemy, period, and therefore so is Mr. Macbeth.

Anonymous said...

JA,
No one is saying that this mess is "all" blacks and Hispanics fault. There's plenty of blame to go around, and sure, Wall Street greed certainly played a role. But there IS a "diversity" angle to this entire business, and it's not being talked about anywhere else. As for greedy capitalists being totally to blame, I've had many interesting experiences in this life, but I've never had a white guy jump out of the bushes with a Glock 9 and force me to take out a subprime mortgage. I'm willing to meet you halfway, JA - greed was part of the problem. Are you open-mineded enough to admit that "diversity" was part of the problem too?

rob said...

Robert Hume,

Mr. Nathan, the subprime borrower interviewed sounds African-American.

the white guy...pulling in 100 grand weekly from convincing people to buy houses they couldn't afford

Who would those 'people' be? If they were largely minorities who later defaulted on their mortgages, it seems characterizing the origin of the credit crunch as being caused by minorities defaulting is fairly accurate.

Of course, if minority mortgagees are not especially likely to default, we will not see sob stories about minorities losing their homes any time soon. Nor will we see stories about empty foreclosed homes blighting black and hispanic neighborhoods.

The diversity recession meme provides a great hurdle for 'blacks hardest hit' reporting. I look forward to seeing how it gets jumped.

Big BIll said...

What a stunning little show by Ira Glass and his NPR buddies. Not that there was any secret to any of this, of course. Makes you wonder why M Glass et al. didn't blow the whistle years ago, doesn't it?

At least you would think they would be humble and admit that they and their New York friends don't have a clue how to run an economy or do good news reporting.

You would think that maybe now they would reconsider the replacement of Americans by Mexicans, or the offshoring of all American jobs. Or at least agree to pick up the entire tab for the Mexican Neo-Americans they keep fighting to import.

But no. They won't. They will find another reason to keep replacing us, eliminating us as soon as they can.

It will be a littl difficult, though, now that the Mexican construction jobs are gone.

The new immigration story is that "we evil white Americans led Mexicans astray, persuading them to abandon their families and their country and move to America to work. We cannot possibly force them home now that they don't have any jobs! We OWE them."

The Ira Glasses of this world will persuade us who have been losing jobs to illegals for decades to suck it up. They will tell us it is our duty to keep paying for illegals and their offspring from now on.

The crash will not be a reason to send them home, but a reason to Heal the World and take care of poor illegals who sacrificed themselves for us right here at home.

Think about it. It was the truly grotesque promiscuity of the homosexual community that caused the AIDS epidemic. Yet their self-inflicted suffering was magically converted into victimhood, which magically absolved them of any responsibility and turned them into sainted "Angels in America" -- Holy Victims of Homophobia.

Just so the coming crash will turn tens of millions of Mexican illegal workers into poor victims the rest of us must educate, feed, clothe, medicate, and shelter in perpetuity.

Martin said...

"Big BIll said...

Think about it. It was the truly grotesque promiscuity of the homosexual community that caused the AIDS epidemic. Yet their self-inflicted suffering was magically converted into victimhood, which magically absolved them of any responsibility and turned them into sainted "Angels in America" -- Holy Victims of Homophobia."

Yes, this is a truly bizarre and self-defeating aspect of modern american culture - pariah into saint.

Consider how normalized muslims are becoming in this country after 9/11. A healthy society would have said "Well, if that's what arab students come here to do, then we'll just do without arab students". But now, we've officially welcomed still more muslims here. The President and all his flacks gas on endlessly with all of that "religion of peace" crap.

It also applied to the ghetto denizens who didn't get out of the way of Katrina, looted every store in sight after it hit, and then complained that "The Man" was trying to drown them by "blowing" the levies.

Martin said...

"laura said...

To Steve Sailer,

I rarely comment on someone's blog only to express sadness, grief, disgust;...."

Laura,

Michelle Obama was employed by a Chicago hospital as some kind of diversity czar. Upon election of her husband to the U.S. Senate, her salary nearly doubled, which goes to show that her only real job was influence peddling.

I have no respect for people, such as the Obamas, who make there living as diversity specialists, community organizers, activists, or any of the other myriad names by which professional parasites are known.

Perhaps you are just shocked that some people don't actually buy this multi-cultural diversity crap which has been force-fed to us for the last forty years. There are more of us every day. Get used to it.

Truth said...

"At least Palin got to where she is by her own efforts,"

The next time you meet a successful man who says he got there without any help, ask him 'how old were you when you started changing your own diaper?'
-J. Paul Getty.

"I have no respect for people, such as the Obamas, who make there living as diversity specialists, community organizers, activists, or any of the other myriad names by which professional parasites are known."

I agree with you here Martin; I have no use for Limbaugh, Rushton, Taylor, Hannity or anyone who works for Faux News either.

Anonymous said...

Perhaps you are just shocked that some people don't actually buy this multi-cultural diversity crap which has been force-fed to us for the last forty years. There are more of us every day. Get used to it.

Amen, brother.

Just as surely as our currency will become severely devalued as an outcome of this crisis at some point, the term 'racist' will also lose its power as enough whites and Asians call shenanigans on the PC/diversity racket wrecking the country.

I'm almost (not quite) not afraid of being tarred with the R-word at this point.

Anonymous said...

There were people funding apartheid in South Africa as well, and perhaps the same deep pockets, so I shouldn't say I'm surprised. - Laura

Oh yes Laura, lets talk about South Africa, bring it on!

And how is SA working out? Those shadowy forces who funded apartheid are out of the way, why arent things going so well? Well, one reason is the people who largely funded apartheid were...wait for it...white South Africans. And whats been happening to them?

Of course racism is strictly a one way street isnt it Laura, when blacks suffer thats racism, when Europeans suffer thats, at worst, bigotry and really nothing to get upset about.

Jewish Atheist said...

Anonymous:

Are you open-mineded enough to admit that "diversity" was part of the problem too?

I don't see how. Minorities are somewhat overrepresented in foreclosures, but that wouldn't have caused a serious problem unless those mortgages were overvalued by the financial institutions and sold and resold and used as collateral, all with shady accounting processes.

Think about it. The whole point of having higher interest rates on risky loans is that it should even out for the banks. The banks fucked up in their calculations, and then the financial institutions fucked up on top of them.

What if minorities had been only proportionately represented in foreclosures and bad loans? Would that have prevented the problem? Absolutely not.

Sailer implies that this whole financial mess has to do with an increasing Latino population, but even if all the bad loans were to Latinos, it's still the banks' job to set interest rates appropriately and it's still the financial companies' job to price those loans correctly.

Jaroslaw said...

Lots of interesting news and stuff on real estate on my second fave blog (this being the first of course) here:

http://thehousingbubbleblog.com/index.html

A great quote today that gives another motive for everything:

“‘We called them ‘foreclosure loans’ because they were doomed to fail,’ said the agent, who didn’t want to be identified because she’s still in the industry. ‘The lender expected the borrower to lose the house and the bank would resell it for its higher appreciated value. But the market dropped and they got caught with their pants down.’”

Anonymous said...

This is bullshit. It has nothing to do with minorities and everything to do with greedy corporations making bad loans.

Nope, it has a great deal to do with NAMs -- and probably Jewish Atheists, too.

Jun said...

anonymous @ 10/04: Just as surely as our currency will become severely devalued as an outcome of this crisis at some point, the term 'racist' will also lose its power as enough whites and Asians call shenanigans on the PC/diversity racket wrecking the country.

I think those two things are gonna go hand-in-hand. If our economy tanks -- I mean really tanks -- political correctness is just going to go right out the window. It simply won't be affordable for most people anymore.

Jun said...

jaroslaw: “‘We called them ‘foreclosure loans’ because they were doomed to fail,’ said the agent, who didn’t want to be identified because she’s still in the industry. ‘The lender expected the borrower to lose the house and the bank would resell it for its higher appreciated value. But the market dropped and they got caught with their pants down.’”

Incredible that so many bankers/lenders could've been so unbelievably stupid. Did they really believe their own spiel that housing prices would always be/go up??